(October 31, 2024) The DXY index, which measures the strength of the dollar United States against a basket of foreign currencies of developed countries, it had a negative trend in recent months until reaching its minimum point after the cut of the FED of 50 basis points in the USA. The interpretation that the market had and that led the DXY to reach its lowest levels of the year was that the aggressive cut would bring with it successive cuts of similar caliber in the following months.
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Indeed, the FED’s rate cut in September 2024 had an immediate impact on the DXY. Following the announcement, the index experienced an initial depreciation, falling approximately 0.4% and approaching 100.50 levels. This movement reflected selling pressure on the dollar, as investors adjusted their expectations to a future scenario of lower returns in dollars.
Despite that stormy month, the US dollar has had a strong October so far, surpassing its 20, 50 and 200 day moving averages with a 4% increase, reaching levels of 104.00.
What is behind this strength? Has the calm come after the storm? The truth is that the dollar is reacting to different factors:
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1. Rising US Treasury yields, which in turn are driven by strong economic data. The yields of the 10-year US bond reached levels close to 3.60% in September, and are now around 4.30%. Better profitability conditions in dollars have a positive impact on the value of the green currency.
2. The U.S. economy is strong compared to most other countries, and real bond yields are the highest among developed countries. Therefore, favorable economic data would have the impact of strengthening the dollar.
3. Elections in the United States and the probability of an expansion of the fiscal deficit would have an impact on the dollar. Expansionary fiscal policies could lead to increases in long-term rates, which in turn would strengthen the dollar.
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So far this year we have seen a volatile DXY that has moved in a trading range that has been between 100 and 107. These fluctuations have similarly carried over to our local currency, the USDPEN has oscillated between 3.65 and 3.90 , reaching the lower part of that range at the end of September after the rate cut in the United States (similar to the DXY).
Since then, the USDPEN has had an upward trend during October that has led it to trade closer to 3.80 and today to be at levels of 3.77. The factors that have led to this movement respond mainly to the external variables mentioned above and that have also affected the different currencies of the region.
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While the bearish storm for the dollar appears to have had a pause, the uncertainty surrounding the combination of factors influencing the behavior of the DXY and USDPEN will set the tone for how long the calm will be.
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